October 31, 2011

Everyone, including Forbes, is reporting that H&R Block has signed an agreement with Walmart to do in store tax preparation starting in December.

So What?

It is not the first, nor will it be the last, time that HRB has offices in Walmart. Walmart always has a tax prep firm in their stores during tax season. They don't care which one it is and this year it will be both HRB and Jackson Hewitt. JH and Walmart signed an agreement in September. JH will be in 2800 Walmart stores. So for every one HRB kisok there will be almost 10 JH kisoks.

Now if Walmart allows both JH and HRB to set up kisoks in the same stores, that would be news.

October 28, 2011

There’s not a lot new on the tax preparer licensing front. The PTIN registration for 2012 returns opened and as anything new and on the computer, there were issues the first few days. The big one is that preparers who mailed in their applications last year are having a little problem renewing online. There is a letter that is suppose to be going out to them, but most haven’t received it yet.

Testing is still starting sometimes soon. No official date yet. But I have seen a copy of the “Candidate Information Bulletin” that Prometic has put together. I assume you get to download a copy but when or where is a mystery. I couldn’t find it on the IRS site today and the Prometic site links back to the IRS.. (Sorry, can’t give you an URL for the booklet. As soon as I get a public link, I’ll post it.)

Here’s what I gleaned:

You have to schedule an appointment to take the test. The fee must be paid at that time not when you take the test. (No mention of the cost yet) Scheduleing will be through the IRS PTIN site.

If you have to re-schedule, you may have to pay an additional fee. Between 29 and 5 days before the scheduled date there will be an extra $35 fee and if you wait until less than 5 calendar days to reschedule you get to pay the whole thing again.

If you’re late to your appointment, you have to reschedule and pay another full fee. If they have an emergency closing, you won’t have to pay again when you reschedule. But if the weather is bad and you can’t get there – yup! You pay again.

If you have an ADA disability, you need to call Prometric and have them send you an accommodation request form. FYI, English as a second language is not considered a disability so no special treatment.

You have to have a current (non-expired) ID. It must be government issued, have your picture and signature and the name must exactly match the name used to register including name suffixes.

The test is given on a computer. You will get an overview of the procedure and have the option to take a pre-test computer tutorial. There will also be an IRS video “What to Expect on Test Day” coming on the IRS site.

The test is 120 questions, 20 of which are considered experimental and will not be graded. You won’t know which are graded and which are experimental. Questions will be multiple choice or true/false. The multiple choice questions will be direct question, incomplete sentence or all but format.

You will be provided reference materials (Pub 17, Form and instructions 1040), on onscreen calculator, scratch paper and pencils. You may not use your own. Nor can you take any scratch paper with you. That will be an act of misconduct.

Two and a half hours are allotted for the test with no breaks. If you need a break, the clock keeps ticking. And you can’t use any phones or electronic device while on break. If you take too many breaks, the test center administrator will be notified.

You can’t bring in any personal/unauthorized things into the test room. They have to be left in a locker. Pockets will be checked out for contraband items. If you have to have something from your locker during the test, you have to get permission first.

Anytime you leave the test room you will have to sign out. Upon returning, you will have to show id, sign back in and be scanned with a metal detector.

You can’t talk to others taking the test, look at their notes or screens.

You will be monitored while taking the test by video, proctor walk-throught and observation window.

You can’t share any part of the test for any reason. In fact, it is prohibited. Seriously prohibited.

What you wear in must stay on. No removing jewelry or jackets in the test room.

You can bring your own soft ear plugs or use the noise blocking headphones the testing center has.

The guide give the impression that test taker will not know if they passed or failed until they receive printed test results with in 60 days. You will be told if you passed but not the score. If you fail, you will be given info to help identify problem domains.

I know that Prometric is an expert at this kind of thing and all of these procedures have been developed for a reason but the rules read like High School detention. I took the SEE in 2002 at the Federal Court House in Wichita. No reference materials or calculators were allowed. We signed in only when we entered the Courthouse, the same for metal detector scan. The biggest security issue was having to be escorted to the rest room by a proctor. We could take our test books with us and most of us marked our answers in the book. In fact, the IRS provided back test books and answer sheets as part of the study materials they offered. And 60 days is a lot quicker than the 4 months I had to wait for results. All the same, I’m glad I don’t have to take this test.

The Taxpayer Advocacy Panel (TAP) has release its report for 2010. The report outlines the work they have done and recommendations they have made to the IRS during the year.

The Taxpayer Advocacy Panel is a citizen committee created in 2002 under the Federal Advisory Committee Act to improve IRS service and customer satisfaction. They don’t work with legislative or specific tax return issues. TAP is currently 102 members serving all states, the District of Columbia and Puerto Rico (allotted by populations but everyone gets at least one) While tax pros and former IRS employees can be members, the panel also includes general citizens. They meet with the general public, individually or in groups, about their program and to listen to problems we are having with the IRS’s customer service. These issues are worked on by members of the panels and suggestions for improvements are sent to the IRS.

In 2010, TAP sent 101 suggestions to the IRS. Of that, 18 were accepted and 12 partially accepted, 37 were rejection and the remainder are still being looked at. Rejection can be because of cost, manpower or adverse effect on collections. Their recommendations included improving signage and other communications in the IRS’s Taxpayer Assistance Centers, improving forms, publications, notices and audit guides, and improvements of the VITA program and related materials. TAP’s proposals don’t just help the taxpayer but also the tax pro. Recent recommendations include special consideration for rural preparers with little access to high speed internet and the new e-file mandates, adding 1099s and 1098s to business e-services, and the use of limited e-mails for confirming appointments and sending documents.

The Taxpayer Advocacy Panel’s entire annual report is available on their website, www.improveirs.org. It includes their recommendations and info about their work this year. Besides the report, you can also check out becoming a member of TAP.

My Tax Reform Proposal: Eliminate all taxes on chocolate. That will create jobs and increase revenues. I don’t say it will create a lot of jobs or how many, but it might - and that in turn will mean more income taxes.

The US Tax Code needs to be fixed. And I realize that this is an election season with every candidate throwing out their two cents for fixing our taxes. But tax reform need to be more than targeting something you don’t like and boldly announcing that fixing that will solve all our issues. Don’t like that some high income taxpayers aren’t paying their fair share in taxes; then change their tax rates. Don’t like the number of people who don’t pay income taxes because of credits: take away their credits and tax them. Don’t like the estate tax: eliminate the estate tax. Then you can fall back on the “My change will create jobs and result in more revenue.” It sounds good even if the basic problem doesn’t get solved.

The first step in any tax reform should be to decide what we want the tax code to do. We need it to fairly generate income to run the country. The more “jobs” you add to the code (employment, social services…), the more complicated and contradictory it will become. Kinda like it is now.

Once we know what we want the tax code to be, creating the actual rules and rates is easy. The hard part is living with the new tax code and leaving it alone. Look at what has happened to the tax code in the 25 years since the last reform.

October 24, 2011

No one likes to be audited. It doesn’t matter if it’s the IRS or a state doing the audit or if it’s a full audit or a notice of a change. Just the letters make us nervous. But most of us make it through the audit and life goes on. Before you completely leave the audit behind, however, clean up your files and make sure you have documented your work.

You need to treat the audit as if you are filing a return. Once a return is done, you should make sure that a copy of the return and all the W-2s, 1099s, receipts and other documentation are together and securely filed away. The same should be done when an audit is over. What to save?

A full copy of the original notice.

A copy of the amended return if one was done.

A copy of all correspondence. This should include what you sent them and they sent you.

Notes from phone calls.

Anything you signed for the IRS, state or your preparer.

All documentation.

Look, you may still need that info. If there are changes made to your Federal return, the IRS will notify your state. The state will want you to amend your state return to show the changes made to the Federal return. Or, you may mention to your preparer that the IRS wanted more money and you sent it to them. Even if the IRS was correct, and don’t assume they were, the changes might affect other returns. Your preparer will need to know what was done for one year to change later years or to make sure the changes were correct.

I’ve lost track of the number of times I needed the info from an audit to prepare a return or handle a state request or “fix” other years and the client can’t find it. Too often they can’t remember what the change concerned. That means a power of attorney and a longer turn around time. It’s easier to keep all your records from the audit where you can get them if they are need. It doesn’t have to be a box of papers; they can all be scanned into a computer file and archived. But keep a record of your audit just as you would a return. And, FYI, make sure your preparer gives you a copy of anything you sign for them including the power of attorney.

October 20, 2011

Just in time for tax planning, the IRS has announced the 2012 tax year inflation adjustments. These cover things like the standard deductions, dependent and personal exemption amounts and earned income credit adjustments. All the changes can be found in Revenue Procedure 2011-52 which is available for download. It's really nice to get this info before all the reference materials have gone to print. Yeah, IRS!

This comes right after the Social Security Administration announced that there will be a Cost of Living Adjustment for 2012 recipients. What remains to be seen is if the increase will be eaten by increases in Medicare.

October 19, 2011

I was doing my usual news reading and a headline popped out at me; “US cannot overhaul tax code in two months: Geithner”. What? Did someone actually think that reform would happen that quickly? What alternate universe have they been living in? In the same article, Secretary Geithner admits that the special fiscal reduction/tax reform group won’t meet their Nov 23rd deadline. If those 6 can’t get a report done, how can the House and Senate get tax reform done?

But what if they could get tax reform done that quickly? What if Congress could work together enough, between major holidays and campaigning, to pass tax reform? What would that look like? Thoughtful and evenly distributed reform or a rag tag mess? And if they could get reform done that quickly, what’s to stop them from starting their changes immediately? Effective January 1, 2012. After all, 2012 is an election year and our elected officials might want to show their constituents that they did get something done. Last year, these same people extended tax cuts at the very last minute and threw the IRS and tax preparers into a tizzy with delayed filing for some forms. Major tax changes effective immediately = heart attack city.

Thankfully, tax reform may start this year but it won’t be completed for a while. We need Congress to think the options through and create a tax code that is fair for everyone. And when they get the changes made, I hope they continue thinking “fair” and make sure they allot enough time to implement the changes and, if necessary, phase in the changes over several years so taxpayers can absorb the changes into their budgets. Of course, I may be the one living in an alternate universe where the concept of partisanship doesn't exist.

October 18, 2011

A divorce or separation can have a major impact on the taxes of the taxpayers involved. And no issue can be harder for a tax pro to deal with than which parent can claim the dependent exemption. While the rules can be a little convoluted, the big problem is the emotion of the issue and the fact that too many attorneys writing the divorce decrees have not keep up with tax law changes and documentation requirements.

The basic rules to claim your child as a dependent (all subject to qualifications and exceptions):

You can’t be claimed as a dependent on someone else’s return. Not that you are being claimed but that you can’t be claimed. There is a difference.

A dependent can’t file a Married Filing Joint return with their spouse (of course there is an exception.)

The dependent must be a US citizen or US national or a resident of the US, Canada or Mexico.

The dependent must be the taxpayer’s son, daughter, stepchild, fosterchild, brother, sister (steps count too) or a descendent of one of these individuals. (There is a 2nd set of requirements if the child not one of these.)

The dependent must live with the taxpayer over 6 months of the year.

They have to be under age 19 or disabled or under 24 and meet student requirements.

The dependent can’t have had enough income to provide over half of their support for the year.

For parents who are no longer together the big issue is number 5 since they generally both meet all of the others. Between the 2 parents, they must have had custody of the child for over half the year. But, only one parent can claim the dependent exemption for the child on the tax return. The IRS has decided (based on Congress's laws), and it has stuck in court, that the parent who actually (physically) had the child more nights during the year gets the exemption. If the court documents give both parents “joint custody” with the child’s physical residence switching every 2 weeks, then the parents will need to sit down with a calendar and count who had the child more nights during the year. That parent has the right to the claim the exemption for that child. If it gets to the point that the IRS is involved, they don’t care what the divorce decree or other court documents say. They want to know who had the child more during the year. And that parent will get the exemption for that child even if the difference is just one night. They become the tax custodial parent.

BUT

The custodial parent has the right to give the non-custodial parent the exemption for that child. They can only “release” the exemption the other parent (no friends, grandparents, brother…) and they are only giving the exemption, and if the child meets the requirements, the child tax credit. There is some documentation required. The custodial parent will need to sign a Form 8332-Release of Claim to Exemption. There are three parts on the form. The first section releases the exemption for that child just for one specific year. The second part allows the release for more than one year. The final section cancels a prior Form 8332 for multiple years. The Form 8332 will be sent to the IRS when the non-custodial parent claims the child on the return. A substitute to Form 8332 can be used but it must include all the same info as the actual form. If the return is paper filed, the Form 8332 goes in with the return. There are special rules to mailing if the return is e-filed. And this will have to be done each year the child is claimed even if the release is for multiple years.

Now for the big issue, a divorce decree or support document generally won’t work to claim an exemption for a child. For it to be acceptable to the IRS, the document must first have no conditions to the release of the exemption. Say Dad has custody but must release the child’s exemption to the Mom in even tax years. So far that will work. However if the exemption release is contingent on Mom being up-to-date on child support, Mom will need a Form 8332. If there is no contingency restricting the exemption, then the court document must be signed by the parents. By the parents, not signed by the attorneys for the parents. If both rules are met, the court document can be used like a Form 8332 as long as a copy is sent to the IRS. I’m sorry, but if the custodial parent won’t sign the Form 8332, it doesn’t matter what the divorce decree says. The only way to force it is to get the attorneys involved.

Dependency issues are confusing and this is just a quick overview of one issue. Please check with a tax pro about your specific situation. Oh, and make sure you keep a copy of the signed Form 8332 or court documents for your records.

October 12, 2011

The national sales tax is back in the news with Herman Cain’s 9-9-9 Tax and it scares me. It scares me because too many people think that it’s a simple solution to the current labyrinth tax code. It’s not a simple solution because there will always be sales excluded from the tax, lobbyists will insure that, and there will be conflicts and confusion between what the Federal government will tax and what the states will tax. However, the tax’s apparent simplicity could make it easy to get through Congress and leave us with a new tax code that needs regular tweaks to be effective. Further complicating the issue is that any Federal sales tax proposal makes some misplaced assumptions.

Years ago, a client loaned me his copy of “The Fair Tax.” to read. I had some real reservations then and I still have those reservations. If anything, I am more convinced that a national sales tax is not the solution everyone believes it to be because it makes two very questionable assumptions; that a national sales tax won’t change (decrease) discretionary spending and that corporations will do the right thing.

Increased sales tax will decrease what I can purchase to keep within my budget. If I have a $100 to spend on a new watch, I know I can spend about $90 on the actual watch and with my local sales tax (8.8%) still come under budget. But, add on more sales tax and I have to look at less expensive watches. Mr. Cain’s 9% limits me to a watch costing $84.00. However… when they decided on what the percentage for the sales tax would be, it was based on my spending $90 not $84. They’ve lost $0.54 in tax. Extrapolate that across the country and a 9% sales tax becomes 10% or more to generate the needed income. Which causes taxpayers to scale back purchases even more, and that increases the shortfall in projected taxes…on and on. Either the tax has to continually rise or the deficit will grow.

Proponents of the national sales tax usually argue that the proposed savings from the elimination of FICA and Medicare paid by companies for their employees will solve the purchase power concern. Since they will no longer have that expense, the business will pass the savings on to consumers. I really doubt that. Some companies will or use the money to postpone a price increase. But too many will use the savings to pay themselves. Corporations will use it to increase dividends and keep shareholders happy. The consumer will see little of corporate savings in lower prices. And if a company does lower the price of their product by the savings from matching FICA and Medicare, it won’t come near offsetting the cost of the sales tax. I hired for only 6 weeks this year and what I will pay in employee matching would only reduce the cost of a return by $0.25. Let’s say she was a full year employee and I gave all the savings back to clients, the savings on each return would only be $3.00. However, my average client would be paying about $12 in sales tax under Mr. Cain’s plan. The tax savings, if given to consumers, won’t cover the tax increase they will pay.

I have problems with any national sales tax being labeled as “the” tax solution. A small sales tax might be an option to supplement income tax but it’s not a simple solution. It doesn’t matter if it’s being proposed to stand alone or be one leg of a proposal, sales tax isn't a magic bullet.

October 08, 2011

Talk about tax reform is everywhere. "Taxes aren't fair!" and "need to go". And key to the arguments of the Tea Party, other reformers and pot stirrers everywhere is the Tax Policy Center's report that in 2009, about 47% of all taxpayers paid no Federal income tax. That has a lot of taxpayers mad because what they heard and has been repeated is that 47% didn't pay Federal income any tax. And in order to fuel the anti-tax fire and win elections, the anger has been shifted from the tax code to pointing fingers at classes and types of people. "He didn't pay any taxes!" That's not fair! Get a rope! "Those People" should be stoned!

Before you throw anything, I have a question. Do you really know who you are stoning?

Are you sure that you aren't in that 47%? Do you really know what tax you paid and not just what your refund or balance due was? Before you start hollering about the tax credits "those people" used to pay no tax, check your return. Did you take advantage of those credits too? How much would you be paying in tax without that credit?Are you living in a glass tax house?

So now you're sure that you really did pay some federal income tax, but before you pick up that stone to throw at those awful people who paid no taxes, I would suggest you check your target. You could be aiming at your children or grandchildren or parent. There is that nice young man who picks up your trash, or the teacher's aide in your son's classes, or your favorite greeter at Walmart. It could also be your boss or the owner of a business. If you want to take out your tax frustrations on the 47%, it's only fair to include everyone who benefited not just the ones you don't like.

Look at the facts. That Tax Polcy Center report covered Federal income tax only. That 47% still paid into Social Security and Medicare, paid sales taxes, local property taxes and in most cases paid state income taxes. And the report found taxpayers in every income level and filing status who didn't pay any Federal income tax. Most of those taxpayers simply took advantage of current tax laws and legally paid no tax.

We need Federal tax reform. What we don't need to do is target taxpayers who are taking advantage of deductions and credits we don't qualify for. Let's face it, if you could qualify you would be using those same credits and deductions. Put your frustration and anger to solving the tax code problem and not throwing stones.

Disclaimer

Disclaimer

A reader should seek advice from an independent tax adviser with respect to the information on this blog based on the reader’s particular circumstances. This advice is intended to be general information and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed here.